We recently compiled a list of the 8 Best Stocks Under $10 To Invest In Now. In this article, we are going to take a look at where Alight, Inc. (NYSE:ALIT) stands against the other stocks under $10.
Investing in stocks priced under $10 can be an appealing strategy for investors looking for growth opportunities without a significant upfront investment. Such stocks, often referred to as penny stocks or small-cap stocks, can offer high returns but also come with greater risk and volatility compared to blue-chip stocks. However, when chosen carefully based on strong fundamentals, solid management, and positive market sentiment, these investments can yield substantial gains over the long term.
According to BlackRock’s Q4 2024 Equity Market Outlook, there are compelling reasons to consider small caps as part of a diversified portfolio. The firm’s analysis highlights that while the economy continues to face uncertainty, this does not necessarily equate to poor stock performance. Market volatility can present investors with an opportunity to buy high-quality stocks at discounted prices, particularly when driven by sentiment rather than company fundamentals.
Fundstrat’s Tom Lee is also bullish on small caps, we covered this in our article about the 10 Best Young Stocks To Buy Now, here’s an excerpt from it:
“As for small-cap stocks represented by the Russell 2000 index, Lee acknowledged some profit-taking after a strong week but maintained that such fluctuations are typical during bottoming phases. He drew parallels to previous market recoveries, such as energy stocks in 2021, suggesting that while current movements may feel erratic, they signal a multi-year growth opportunity for small caps.”
The past year has seen several “mini rolling recessions,” starting in sectors like technology and housing, as the global economy grapples with a post-pandemic recalibration. Yet, the stock market has shown resilience and adaptability, with many companies adjusting to what can be seen as a return to more stable economic conditions. Volatility, though unsettling, can be a favorable condition for seasoned investors who can spot value opportunities.
In the current environment, where the Federal Reserve’s policy decisions and upcoming elections are expected to further influence volatility, it’s essential for investors to look beyond temporary market disruptions and focus on the fundamentals of individual companies. Historically, the stock market has been a forward-looking mechanism that attempts to predict recessions with mixed success. Market volatility can present investors with an opportunity to buy high-quality stocks at discounted prices, particularly when driven by sentiment rather than company fundamentals.
One key takeaway is that large-cap stocks may present greater opportunities compared to both mega-caps and small-cap stocks. This perspective is based on observations from the third quarter when concerns over a slowing economy led to market turbulence. However, these concerns were largely rooted in sentiment rather than the actual financial health of most companies.
Moreover, volatility can be a double-edged sword. On one hand, it can trigger sell-offs due to investor fear or uncertainty, but on the other, it can provide strategic buying opportunities for fundamentally sound stocks trading at lower prices. Investors should consider adopting a selective approach during these periods, ensuring that they have a deep understanding of the companies in which they invest. This strategy can instill confidence and conviction when markets experience short-term volatility.
Historically, market corrections, defined as declines of 10% or more, are not uncommon. In fact, over the past 35 years, corrections have occurred in 20 years, with an average drawdown of 14%. Yet, during this period, the S&P 500 Index has delivered an average annual return of 11%. Investors who stay the course through these corrections have often been rewarded with strong returns as the market eventually rebounds.
The impact of Federal Reserve rate cuts on different stock categories is also an important consideration. Equity markets generally perform well when the Fed initiates rate cuts, particularly in the absence of a recession. Historical data shows that in the year following the first rate cut of a cycle, large-cap stocks tend to outperform small-cap stocks, with high-quality and low-beta stocks also being strong performers. This trend is observed two and three years after the start of a rate-cutting cycle, suggesting that investors might consider shifting focus to these segments as the Fed’s monetary policy evolves.
Sector performance is another crucial area to explore. Sectors such as healthcare and consumer staples have historically outperformed in the year following the first rate cut of a cycle, driven by their defensive nature and consistent demand. Meanwhile, cyclical sectors like financials typically gain momentum as the cycle progresses and the economy enters a recovery phase.
While every market cycle is unique, the healthcare sector is seen as a potential outperformer over the long term, supported by secular tailwinds such as an aging population and rising health needs. Furthermore, the technology sector, driven by innovation in artificial intelligence and cloud computing, is also poised for long-term growth despite recent setbacks. The integration of AI and machine learning into various industries has created new revenue streams, enhancing operational efficiency and profitability for companies involved.
As the stock market navigates these complexities, investors should maintain a balanced perspective and not shy away from exploring undervalued opportunities. Stocks under $10, while inherently riskier, can still provide substantial upside when identified through rigorous analysis and an understanding of industry trends. For example, some companies in sectors like renewable energy, biotechnology, and digital transformation have shown the potential to scale rapidly from a lower base, driven by strong business models and favorable macroeconomic factors.
Furthermore, sectors that are less sensitive to economic downturns, such as utilities and essential consumer goods, also present interesting opportunities for investing in lower-priced stocks. These sectors tend to exhibit stable revenue streams, which can help cushion portfolios during periods of heightened market volatility. For investors with a higher risk tolerance, energy and tech stocks could offer substantial gains, especially as new innovations and infrastructure developments continue to take shape.
Ultimately, the key to successfully investing in lower-priced stocks lies in adopting a diversified approach, focusing on sectors that demonstrate long-term resilience and growth potential. By analyzing company fundamentals, industry position, and market sentiment, investors can better position themselves to capture opportunities that arise from market fluctuations.
Our Methodology
For this article, we used the Finviz screener and identified 20 stocks with market capitalizations of over $2 billion, having Buy or better rating from analysts, with share prices under $10, as of September 27. Next, we examined Insider Monkey’s data on 912 hedge funds as of Q2 2024. We narrowed down our list to 8 stocks most widely held by institutional investors and ranked them in ascending order of the number of hedge funds that have stakes in them as of Q2 of 2024.
At Insider Monkey we are obsessed with the stocks that hedge funds pile into. The reason is simple: our research has shown that we can outperform the market by imitating the top stock picks of the best hedge funds. Our quarterly newsletter’s strategy selects 14 small-cap and large-cap stocks every quarter and has returned 275% since May 2014, beating its benchmark by 150 percentage points (see more details here).
A person viewing their financial progress on a computer, highlighting the financial health offerings of the company.
Alight, Inc. (NYSE:ALIT)
Number of Hedge Fund Holders: 42
Share Price as of September 27: $7.27
Alight, Inc. (NYSE:ALIT) is a leading provider of cloud-based integrated digital human capital and business solutions, serving a global clientele through its Employer Solutions and Professional Services segments. The company offers a variety of services including employee wellbeing, benefits administration, healthcare navigation, and consulting. The company’s Alight Worklife platform enhances employee engagement, helping organizations create a high-performance culture. As of Q2 2024, Alight was held by 42 hedge funds, a slight decline from 44 hedge funds in the previous quarter, indicating sustained institutional interest in the stock.
During its Q2 2024 earnings call, Alight, Inc. (NYSE:ALIT) reported solid financial performance, highlighting transformational achievements. Alight’s divestiture of its payroll and professional services business has enhanced its financial profile, boosting gross margins by 350 basis points to over 40% and raising adjusted EBITDA margins from 21.7% to 25%. The company also completed its two-year cloud migration program, expected to generate $75 million in annual run rate cost savings, contributing to margin expansion.
A key highlight from the earnings call was the reduction of Alight, Inc. (NYSE:ALIT) net leverage to 2.8x on a trailing twelve months adjusted EBITDA basis, thanks to the retirement of $740 million in debt. This reduction positions the company with greater financial flexibility. The company also announced $155 million in share repurchases, which will retire over 3% of its outstanding shares, indicating management’s confidence in Alight’s future growth.
Financial metrics underscore Alight, Inc. (NYSE:ALIT) strength. Total revenue for Q2 2024 was $550 million, and adjusted gross profit stood at $219 million with an adjusted gross margin of 39.8%. Adjusted EBITDA came in at $128 million, reflecting a margin of 23.3%, which improved sequentially. Additionally, the company’s annual recurring revenue (ARR) bookings increased by 9% in the first half of 2024, supported by new contracts with large clients like UPS, Wayfair, and American Honda Motor Company.
With long-term contracts representing over 90% of total revenue, Alight, Inc. (NYSE:ALIT) expects stable revenue growth of 4% to 6% annually. The company’s robust revenue model, strong margins, and cost efficiencies make Alight, Inc. (NYSE:ALIT) an attractive stock under $10 to consider for long-term investment.
Polen U.S. Small Company Growth Strategy stated the following regarding Alight, Inc. (NYSE:ALIT) in its Q2 2024 investor letter:
“Alight, Inc. (NYSE:ALIT) is a benefits administration outsourcing business serving large enterprise companies, including 70% of the Fortune 100.3 Based on our analysis, the core business is a stable, low-churn, and generally sticky business, albeit more slowly growing. That said, over the last several years, this has evolved as the company has adopted a faster-growing software-enabled cloud strategy. Overall, we think the business is performing well despite headwinds from slower demand given the macro environment uncertainty. Earlier this year, the company announced the decision to sell its payroll and professional services business. While initially well received by the markets, this has ultimately created some uncertainty about the profile and growth of the core business. We trimmed our position while we continue to review the investment.”
Overall ALIT ranks 3rd on our list of the best stocks under $10 to invest in now. While we acknowledge the potential of ALIT as an investment, our conviction lies in the belief that some AI stocks hold greater promise for delivering higher returns and doing so within a shorter timeframe. If you are looking for an AI stock that is more promising than ALIT but that trades at less than 5 times its earnings, check out our report about the cheapest AI stock.
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Disclosure: None. This article is originally published at Insider Monkey.
